Has the moment arrived for a long position in gold? We think so. There have been several false dawns for the gold price, with the usual gold bugs trying to egg on the market and a number of interesting conspiracy theories circulating in the market. Many investors would like to know why gold is steadfastly in a holding pattern while other assets like Bitcoin seem to be responding to the higher inflation numbers we are seeing.
Today we are putting on a long gold trade on expectations that central banks do not have inflation under control and that investors will now start buying gold and gold mining stocks.
Inflation numbers are now starting to look a bit more worrying, and there will be many investors who WILL be buying gold as they see these reading. Bitcoin is not going to be a big enough cave for everyone to hide in.
Are central banks starting to lose the plot?
“The release of record-busting US CPI-inflation data for October has seriously dented the Federal Reserve’s long-standing argument that high inflation will prove “transitory,” said Olivier Desbarres, founder of 4X Global Research. “What has proved transitory is the rally in short-end government bond yields in developed markets, in line with our expectations. Unfavourable base effects no longer explain elevated year-on-year inflation, with US inflation now well above the pre-pandemic trend.”
Desbarres says that the Fed has little control over international energy and commodity prices and coincidentally is seemingly intent on letting consumer demand (and the economy) run hot for a while.
Let’s look at the technical indicators
There are also some technical indicators that seem to show that gold is gearing up for something further. On 5 November gold took out a shorter-term intermediate top at $1813 for the first time in a long time. If (when) 1834.15 is taken out, then the series of falling tops and the falling trend line from the all time high of 2075 cash (2089 future) back in August will also be broken.
Long term gold picture
The double bottom at 1670 to 1675 could change the structural status of the market to become a double bottom and basis for the next bull round, potentially into a new ATM.
Buy signals in gold did show up in other currencies and on October 31 gold printed the highest monthly close against JPY, indicating that strong bullish sentiment, earlier than against the USD. Against the Euro the breaking of the falling trendline happened back on October 12 and the structural break also happened on 5 November.
Short term gold picture
“Combined with the current inflation printings in the background, providing the impression that the central banks are losing the war on inflation, and that the ‘transitory’ situation was only transitory when it comes to the broader trust in the central banks’ ability to control yields, AND if the central banks win and stay successful in their yield fight, that will provide strong negative real yields and the best possible fundamental background for rising gold prices historically,” said Henrik Mikkelsen, Vice President at Cloudbreak Discovery and CIO at Iridis in Zug, Switzerland.
Mikkelsen says that for gold bugs, things seem to be improving. He feels that technically the bullish picture for gold will stay positive so long as the break point of 1834 is kept intact on closing prices. If it gets below that, he reckons, things will turn bad again.
“A test and rejection of the 1834 level – give it $5 room – would be optimal for a robust outlook for gold and a good positioning place for both gold and for gold stocks,” he says. “Both assets need to be staying positive, else the credibility in the signals gets clouded, and maybe something else is in play.”
Our gold trade
So onto the gold trade. For a short term tactical trade like this we are adding the trade to our trading ideas portfolio which runs a 10% trailing stop loss. We would only use Contracts for Difference or Spread Betting on a much shorter term calculation and feel overnight financing rates would be crippling for this one. An Exchange Traded Fund would be a less expensive way to access this trade.
Here are six gold ETFs which are proving popular in the market:
- WisdomTree Physical Gold USD
- SPDR Gold Shares USD
- iShares Gold Trust USD
- ZKB Gold ETF AA CHF
- Aberdeen Standard Physical Swiss Gold Shares ETF
- Swisscanto Precious Metals – Physical Gold
We’re going with the SPDR Gold Shares ETF (NYSE:GLD) ourselves, as it tracks the LBMA London Gold Market Fixing Price PM Index. It provides physical exposure and is listed on several exchanges in a variety of currencies, including USD, EUR and HKD (Hong Kong Exchanges & Clearing). It has over $58bn in assets, a tracking error of 0.38% and a total expense ratio of 0.40%.
It is possible to find more leveraged versions of gold ETFs on the market, at x2 or x3 levels. ETFs have the advantage of being able to trade like normal shares and some – not all – can qualify for an ISA.
- Long Gold
- Instrument type: ETF
- Instrument: SPDR Gold Shares USD (NYSE:GLD)
- Entry Price: $173
- Target: $250
- Stop loss: 10%
- Portfolio: Tactical Trading